According to the latest statistics from Viridian Capital Advisors, more and more marijuana companies are opting for debt financing as opposed to equity financing in the United States. Viridian Capital Advisors is a company that advises marijuana entities on strategy and M&A as well as on how to access or raise capital.
According to Viridian Capital, debt financing now commands 93% of all financing secured by marijuana companies that focus on retail or cultivation, while the industry average for debt financing stands at 55.7%. It should be noted that year-to-date figures show a decline in both equity financing as well as debt financing, but the current figures show an uptick in debt financing.
One reason for this trend is that many marijuana firms are maturing and they have their act in order, which means that financiers can look at their balance sheets and lend them money based on their cash flows. Given that many firms are actually earning revenues, it is easier for them to repay loans, and that makes debt financing a better option to equity financing.
To be fair, equity financing isn’t by itself a bad option and many companies have been able to grow and scale their operations by using the money raised through selling stocks. However, the prevailing economic conditions of high inflation have dampened stocks overall, and cannabis stocks haven’t been spared. This has made raising capital from stock exchanges less attractive, at least for the time being.
Analysts forecast that debt financing will continue to be the preferred way for cannabis companies to raise money for their operations and expansion plans until any one or several factors change for the better. These include a reduction in interest rates, a major policy shift at the federal level, a bull run for marijuana stocks or a combination of those factors.
Companies looking to secure debt financing are advised to pay close attention to the payment and prepayment terms upon which their loans are premised. For example, TerrAscend got a $45 million loan issued by Pelorus Equity Group. The loan attracted a 12.7% floating interest rate, meaning that the interest will go up or down depending on the prevailing rates. Given that the Fed is currently raising interest rates in order to put a lid on runaway inflation, chances are the interest paid by the multistate operator could increase in the course of the loan’s term.
Such possibilities several months or years down the road could impact the benefit derived from debt financing, and Viridian Capital cautions that care has to be taken because lenders will do what is within their rights to protect their investments and earn a profit. Since each company is different, companies such as REZYFi Inc. will probably table their own unique positions if and when they need to raise more money to capitalize on an opportunity or get breathing space if they ever face liquidity issues.
NOTE TO INVESTORS: The latest news and updates relating to REZYFi, Inc. are available in the company’s newsroom at https://cnw.fm/REZY
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